Analysis of Politics, Philosophy and Economics from a Marxist Perspective

Tuesday, 21 February 2017

Business Rates

There has
been a lot of discussion, over the last week, about Business Rates.
The Tories have once more got themselves into a bit of a pickle,
because they are in danger of alienating some of their small business
supporters in the better off parts of the country, particularly
London and the South-East. The basic issue is this. Business Rates
are calculated on commercial property values, and in the better-off
parts of the country, particularly London, commercial property
values along with other property values have soared into an
unsustainable bubble over the last decade. That means that Business
Rates in these areas should rise. On the other hand, in other parts
of the country, property values have stagnated or fallen, and so
Business Rates in these areas are scheduled to fall. Overall, the
Tories claim that the falls in Business Rates, will be larger than
the rises, but it is those facing the rises, and specifically the
largest rises that are complaining, and putting pressure on their
Tory representatives.

Of course,
the fact is that, commercial property has not been revalued for seven
years. The revaluation should have been done, and the effects
implemented ahead of the 2015 election, but the Tories, fearing the
kind of hostility they are now encountering, deferred it to boost
their election hopes. The reality is, therefore, that for the last
seven years, when property values in London have soared, businesses
there and elsewhere, that experienced these property bubbles have
benefited compared to other parts of the country, who likewise,
therefore, continued to pay too much in Business Rates. In other
words, as with many more things, for example, the cost of commuter
rail travel to London, the rest of the country has been subsidising
already buoyant businesses in the capital.

The owners
of these businesses in London, are complaining about the size of the
rises they now face, of as much as 300%. But, the fact is that they
know how Business Rates work, and they know that in the last seven
years, at least, property values in London have been in an
unsustainable bubble. They have had seven years, during which time
their Business Rates were lower than they should have been, to have
set aside some of their profits to cover this rise when it came, or
else to have used that time to relocate their business to other parts
of the country, where property values have not soared, if the
question of such rates are a significant impediment to their
business.

After all,
that is how the capitalist market is supposed to operate. If costs
rise in London to a level where firms make lower profits than in say
Stoke, those businesses should relocate to Stoke, where their costs
will be lower, and their profits higher. That would provide work for
the people of Stoke who over the last seven years and more, have
suffered from the policies of fiscal austerity that in part have been
driven by the government's attempts to keep interest rates low, and
to keep the property bubbles in places like London inflated. The
increase in the demand for labour-power in Stoke would then increase
workers wages in the area, and increase the demand for property,
bringing about a rebalancing, whilst the fall in employment in
London, and fall in the demand for property, would decrease London
wages, burst the London property bubble, and thereby bring about an
equalisation. This is the basis for the formation of a general rate of profit that drives the allocation of capital in a capitalist
economy.

As this
reallocation of capital, to places like Stoke, then occurs it not only
raises living standards in the area, which have been decimated, as a
result of the conservative policies implemented over the last thirty
years, but on the back of those higher revenues for workers and
businesses, it would also raise local taxes to finance the decayed
infrastructure and so on that has been destroyed over that period,
and which has led to the rise of reactionary forces such as UKIP and
Brexit. There is then no economic rationale for the Tories
collapsing, over the demands of business owners in London and other
areas, where property values have soared. But, as with the situation
before the 2015 election, and other issues relating to property
bubbles, the reason the Tories are likely to buckle is purely
political.

It isn't big
businesses that are complaining about the rise in business rates.
For these businesses, such taxes represent only a small part of their
profits. It is the small businesses that are complaining, because
the tax forms a larger part of their profits. But, that is the
problem the Tories face, because they represent the interests of
these small private businesses, as well as the interests of
money-lending capitalists, and landlords. It is these small private
capitalists that make up the core of the Tory party membership, and
of its electoral base. Yet, if the Tories concede to those interests
in London, it will relatively disadvantage the same social layers in
the rest of the country.

Looking at
the small businesses in London, either they own or rent those
properties. The business owners who own the property, of course,
have not complained about the huge speculative capital gains they
have made in the prices of those properties over the last seven years
and beyond, which have absolutely nothing to do with any effort on
their part. Their is a good economic argument for encouraging such
beneficiaries of these speculative capital gains to realise them by
selling their properties and moving their business to some other lower
cost part of the country, as described above. There is no economic
argument for facilitating further such speculative gains, and
allowing those business owners to benefit from them, by effectively
subsidising their current Business Rate liability.

After all,
the basis of the rise in those rates is not a rise in the actual tax
rate itself, but is the fault of that very rise in property values.
If small businesses in London want to see lower Business Rates, they
should place the blame where it lies, on hugely inflated property
values, and seek to burst that property bubble.

For those
businesses in London that rent their premises a different set of
questions arises. Firstly, high commercial property prices are a
reflection of high commercial rents, because property prices are
capitalised rent. But, as Ricardo and Marx described long ago, the
reason there are higher differential rents in one area as opposed to
another, is because the difference between commodityvalues and the
price of production is greater in some areas than others, so that
surplus profits are obtained, and landlords thereby levy a
differential rent on this surplus profit. In other words, the
economic conditions in London, facilitate surplus profits for
businesses there, which enables landlords to levy higher differential
rents, which thereby inflates property prices. There is little
economic basis, let alone social justice basis, therefore, for the
less well off, economically depressed parts of Britain, to subsidise
London business, and London landlords, by subsidising the business
rates of small businesses in the capital.

The same
small businesses that are complaining about the rise in Business
Rates, do not seem to have complained in the same way about the
higher commercial rents they have had to pay over the last seven years, and yet one might assume that these rents are a more
significant portion of their profit than is Business Rates. Higher
Business rates, required to finance local services and so on, in
London, would reduce the amount available to be paid out as rents to
landlords, which would in turn assist in lowering London property
values. There is no reason that anyone should be subsidising London
landlords, who have made a killing from simply being parasites
leaching off the economic activity of others.

The Tories,
of course, are likely for purely political reasons to subsidise both
the small businesses and landlords in London and the South-East,
which again effectively means helping to keep those property bubbles
inflated, and paying for it by draining surplus value from productive
investment, and from the more deprived areas of the country. It is
the same conservative political agenda, which over the last thirty
years left large swathes of the country in a state of decay and
decline, with similar conservative policies in the US and EU having
the same effect that then leads to the rise of reactionary separatist
and nationalist agendas and parties.

When house
prices entered an unsustainable bubble, it led to the 2007-9
financial crisis. The bubble in house prices should have meant that
demand for them, itself largely artificially stoked, for speculative
purposes, by the Tory government in the 1980's and after, collapsed, causing a
collapse in those prices. In fact, that is what happened. In parts
of the US, property prices fell by around 60%, the same was true in
Ireland. In Britain, house prices fell by 20% in short order –
demonstrating that the high prices had nothing to do with some
structural shortage of supply – and were on their way to exceeding
the 40% drop they suffered in similar conditions in 1990. But,
instead of allowing that collapse to proceed in order to restore some
semblance of rationality to the property market, first the Labour
government of Gordon Brown, slashed banks borrowing costs so that
they could subsidise mortgages, and then as those money drugs wore
off, after 2010, the new Tory-Liberal government, artificially
boosted demand yet again with the Help To Buy scams, and so on, so as
to prevent the bubble from bursting. The Tories are addicted to
these property and financial bubbles, because the illusion of wealth
they create is central to the fictitious wealth of those sections of
the population on which they rely for their support. But, the cost
of keeping those bubbles inflated is to damage actual economic growth
and productive investment. Moreover, the cost of doing that has
grown more and more over the years, so that it is now unsustainable.

Rents are at
massively inflated levels, and yet rental yields are at record lows;
dividend and bond yields are at near zero levels, and yet the amounts
paid out in dividends and interest are at high levels; mortgage rates
have been reduced to record low levels, and yet mortgage payments
have soared, and an increasing number cannot afford to buy a house,
because house prices themselves have ballooned to ridiculously high
levels. In the meantime, dragged down with all of this debt,
increasing numbers of people cannot get through the month without
resort to high cost credit on their credit cards, or to payday
lenders charging up to 4000% p.a. interest rates. This is not just
unsustainable, it is way beyond unsustainable. The lesson that
should have been learned over the last thirty years is that economies
cannot be built upon such fictitious wealth and debt, and when this
bubble inevitably bursts, the consequences will be much greater than
in 2008, when that reality first broke through.

Of course,
Business Rates are themselves a bad tax, just as domestic rates had
been, and as Council Tax is now. They are all regressive forms of
taxation, which is why, in relation to Business Rates, it is the small
businesses that are complaining, not the big businesses. It would be
far better to replace both Business Rates and Council Tax with a
local income tax. Modern computer technology makes that quite easy
to achieve.

In fact, asI wrote previously, I would also scrap Corporation Tax, and replace
it with much higher taxes on dividend income, so as to encourage
firms to reinvest their profits into the business rather than pay it
out as dividends. I would accompany that with changes in the laws on
corporate governance, so as to remove the rights of shareholders to
elect company boards, and instead give that right to the workers and
managers within the company. That would also deal with the question
of corporate raiders simply buying up the shares of a company, and
then using their control to shift production elsewhere.

And, as I
also wrote some time ago, if companies are to be taxed, they should, like workers, be taxed on their sales not their profits. If
workers paid income tax only on the profits they made from selling
their labour-power, as companies do in paying corporation tax on
their profits, then workers would pay no income tax, because they
make no profit on selling their labour-power. The cost of producing
their labour-power is equal to the price they obtain for it, in the
form of their wages – if they are lucky!

The problem
with local income taxes is that in those areas of the country where
economic activity is already depressed, and where more is required to
cover things such as social care, health care and so on, the tax base
is also lower. That means that either the services provided in those
areas are of lower quality, reducing the use value of labour in that
area, and also acting as a deterrent for other inward investment, or
else the rates of tax levied in such areas have to be higher, again
acting as a deterrent for inward investment, and encouraging the
better paid workers to also move out to lower tax areas. That was
witnessed in New York, during the 1970's, for instance.

In order for
such local income taxes to work properly, therefore, they have to be
accompanied by forms of fiscal transfers from a central state
authority, so as to create a more level playing field within the
overall economy, and in order to prevent a race to the bottom in
relation to taxes, and services. In fact, that is one reason that
not only is Socialism In One Country a reactionary and utopian
concept, but in the modern globalised world, with a world economy,
and capital taking the form of huge multinational companies, even the
idea of social-democracy in one country is a reactionary and utopian
concept. It is why the foundation of the Eurozone was always flawed,
and why the EU will have to bring about greater fiscal and monetary
integration, and introduce greater fiscal transfers across the member
states, so as to promote growth in economies such as Greece,
Portugal, Italy and Spain.

It is also
why Brexit is a thoroughly reactionary concept that will damage the
interests of workers, particularly in Britain, for decades to come,
if it is ever pushed through.

About Me

Left school at 16. Became an ASTMS shop steward at 19, and a lifelong trade union activist. Delegate to North Staffs Trades Council 1974-87. Secretary North Staffs Miners Support Committee 1984-5. President North Staffs Trades Council 1985-6 and 1986-7. Delegate to Staffordshire Association of Trades Councils 1985-7. Delegate West Midlands Regional Council of the TUC 1985-7. Secretary Newcastle UNISON 2000-2.
Member of the International Communist League/Workers Socialist League 1974-87.
Went to University as mature student at age of 24. Obtained Joint Honours Degree in Economics and Politics with Philosophy and Statistics, followed by a Post Graduate Certificate in Education.
Labour Party member since 1974. Stoke City Councillor 1983-4, expelled from Labour group 1983, and resigned from Council in 1984 because of refusing to vote for rent and rate rises, and budget cuts. Staffordshire County Councillor 1997-2005.
Assistant Secretary Stoke District Labour Party 1981, and held pretty much every position from Executive member, to Branch Secretary, and Branch Chair.